Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Define with Explain it each one Concept of Financial Accounting Discuss the topic, Financial Accounting: Meaning of Financial Accounting, Definition of Financial Accounting, Nature and Scope of Financial Accounting, and Limitations of Financial Accounting! Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statements such as an income statement or a balance sheet. Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. Also learned, Accountability in Financial Management, Financial Accounting: Meaning, Nature, and Scope!
Learn, Explain Financial Accounting: Meaning, Nature, and Scope!
If a corporation’s stock is publicly traded, however, its financial statements (and other financial reporting) tend to be widely circulated, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts. It’s important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves.
Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is the organization that develops the accounting standards and principles. Corporations whose stock is publicly traded must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. The similarity between Financial and Management Accounting!
#Meaning of Financial Accounting:
Accounting is the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions of the business for the benefit of management and those parties who are interested in business such as shareholders, creditors, bankers, customers, employees, and government. Thus, it is concerned with financial reporting and decision making aspects of the business.
The American Institute of Certified Public Accountants Committee on Terminology proposed in 1941 that accounting may be defined as, “The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof”.
The term ‘Accounting’ unless otherwise specifically stated always refers to ‘Financial Accounting’. Financial Accounting is commonly carrying on in the general offices of a business. It is concerned with revenues, expenses, assets, and liabilities of a business house. Financial Accounting has the two-fold objective, viz,
- To ascertain the profitability of the business, and
- To know the financial position of the concern.
#Nature and Scope of Financial Accounting:
Financial accounting is a useful tool to manage and to external users such as shareholders, potential owners, creditors, customers, employee, and government. It provides information regarding the results of its operations and the financial status of the business.
The following are the functional areas of financial accounting:-
- Dealing with financial transactions: Accounting as a process deals only with those transactions which are measurable in terms of money. Anything which cannot be expressed in monetary terms does not form part of financial accounting however significant it is.
- Recording of information: Accounting is an art of recording financial transactions of a business concern. There is a limitation for human memory. It is not possible to remember all transactions of the business. Therefore, the information is recorded in a set of books called Journal and other subsidiary books and it is useful for management in its decision-making process.
- Classification of Data: The recorded data is arranged in a manner so as to group the transactions of similar nature at one place so that full information of these items may be collected under different heads. This is done in the book called ‘Ledger’. For example, we may have accounts called ‘Salaries’, ‘Rent’, ‘Interest’, Advertisement’, etc. To verify the arithmetical accuracy of such accounts, the trial balance is prepared.
- Making Summaries: The classified information of the trial balance is used to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information. The final accounts are prepared to find out operational efficiency and financial strength of the business.
- Analyzing: It is the process of establishing the relationship between the items of the profit and loss account and the balance sheet. The purpose is to identify the financial strength and weakness of the business. It also provides a basis for interpretation.
- Interpreting the financial information: It is concerned with explaining the meaning and significance of the relationships established by the analysis. It should be useful to the users, so as to enable them to take correct decisions.
- Communicating the results: The profitability and financial position of the business as interpreted above are communicated to the interested parties at regular intervals so as to assist them to make their own conclusions.
#Limitations of Financial Accounting:
Financial accounting is concerned with the preparation of final accounts. The business has become so complex that mere final accounts are not sufficient for meeting financial needs. Financial accounting is like a post-mortem report. At the most, it can reveal what has happened so far, but it cannot exercise any control over the past happenings.
The limitations of financial accounting are as follows:-
- It records only quantitative information.
- It records only the historical cost. The impact of future uncertainties has no place in financial accounting.
- It does not take into account price level changes.
- It provides information about the whole concern. Product-wise, process-wise, department-wise or information of any other line of activity cannot be obtained separately from the financial accounting.
- Cost figures are not known in advance. Therefore, it is not possible to fix the price in advance. It does not provide information to increase or reduce the selling price.
- As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to evaluate the performance of the business.
- It does not tell about the optimum or otherwise of the quantum of profit made and does not provide the ways and means to increase the profits.
- In case of loss, whether loss can be reduced or converted into profit by means of cost control and cost reduction? Financial accounting does not answer this question.
- Does it not reveal which departments are performing well? Which ones are incurring losses and how much is the loss in each case?
- It does not provide the cost of products manufactured
- There are no means provided by financial accounting to reduce the wastage.
- Can the expenses be reduced which results in the reduction of product cost and if so, to what extent and how? No answer to these questions.
- It is not helpful to the management in taking strategic decisions like replacement of assets, an introduction of new products, discontinuation of an existing line, expansion of capacity, etc.
- It provides ample scope for manipulation like overvaluation or undervaluation. This possibility of manipulation reduces the reliability.
- It is technical in nature. A person not conversant with accounting has little utility of the financial accounts.